Good morning. My name is Stefan Ranstrand. I have the privilege to be heading Tomra Group. I am here today together with Espen Gundersen and Bing to present our 2018 and fourth quarter 2018 result. If we look into 2018 of Tomra, we have an exciting year behind. We have seen actually very good momentum in the recycling business. If you look into the whole world, there is a lot of material being recycled. China, in the beginning of the year, decided that they will no longer become the waste dump of the world. Good morning. My name is Stefan Ranstrand. I have the privilege to be heading Tomra Group. I am here today together with Espen Gundersen and Bing to present our 2018 and fourth quarter 2018 result. We are making a rehearsal here. If we look into 2018 of Tomra. Actually, I recorded this yesterday, so. What do they call that?
A playback, or what do they call it?
Just hired.
You have the right to get your money back for your tickets. I don't know if I should restart, but I do restart very shortly. Very nice to be seeing you all. Thank you for coming, and thank you for attending. Espen Gundersen, Bing, and myself, Stefan Ranstrand, would like to present Tomra's fourth quarter and 2018 results. 2018 was an exciting year for us. We had good momentum in recycling. You might recall that in the beginning of the year, China said, "We will no longer be the waste dump of the world." They put up a regulation, which they called National Sword, and that led to that countries that until now have been exporting their plastic or their waste into China no longer could do so.
You see the mountains growing of waste because they could no longer export it. We also, in result of that, saw a very strong demand for sorting equipment, which is not a short-term story that will actually continue. We just saw that increase in 2018. We see that some other markets are coming in, where they are actually exporting instead of to China, into Malaysia and to some other, like Indonesia and so on. These countries themselves are trying to put up a ban on this because it is not right to export waste. It's an opportunity, actually, to make local use of it and create green jobs. That's not part of the story here. I just want to say that we had a good momentum in recycling, and we probably expect to be continuing experiencing good business in that environment.
We also saw a lot of discussions, fairly new for us, when it comes to new deposit markets. Actually, Espen talks about a tsunami. I rather talk about a surf wave here, because tsunami is a little bit, have negative effects. A surf wave can be quite sunny and nice. We think that that is something really exciting. We'll talk shortly about the most present ones shortly. In food, we experienced a solid market situation. We expect food to be less event-driven. It is a steady, continuous growing business as the world needs more food, as there is a need for automation because of cost of labor, shortage of labor, and in some markets, actually, you have no alternative.
If you take a country like China, as just using an example, they have a lot of people working in the farming sector, predominantly old people, very manual farming work and food processing work. As most of the young people are actually moving into the cities, it remains with the older generation to produce the food. China being the food producer and food consumer in the world, they need to solve that. Automation is part of the solution here. We think that not only in China, but this is a continuous good business, and they are looking for the need to automate, to replace people, and also need to bring quality assurance. That's exactly what we contribute to with our solutions. Further to that, in 2018, we did get the opportunity to acquire BBC Technologies, a New Zealand-based company focusing on predominantly in blueberries.
They are number 1 in the world, but also doing some sorting of cherries and cherry tomatoes. It is a really fine company. We are very proud owners of them. They have not disappointed us so far. We're also very excited about them in the future. We, further to that, in November last year, had the opportunity to enter into Queensland with 10 sites in line with their new deposit system. It's quite a different system to that which we have experienced in New South Wales. Nevertheless, we got 10 sites. We are happy with the start phase there. It went flawlessly. I'm very proud of the team, that we have the ability to also serve a market which is really on the other side of the world, go in, start up on a date with a new solution, because all of them are somewhat different.
It doesn't look like in Germany. It's a somewhat different setup, but the team is geared up to engineer a solution, bring it to shore, install it, and turn it on on time. It's quite magical. Very proud moment for us all. We had a full year for the first time of Queensland. New South Wales. New South Wales, we commenced the 1st of December in 2017, so 2018 was a full year. Within the first 12 months, we collected more than 1 billion objects. Quite an achievement. Many of these objects would otherwise have ended up in the oceans, in the land. Now people see this is a good option, and we have throughout, very positive feedback. It was a little bit grumpy in the beginning, also because of delays.
For us, the challenge was really to get sites where we could put our machines. Once we came over that, once we got the system working, it's well-recognized by the politician, by municipalities, and by the public, and we are very pleased with that. It's well in line with our expectations, actually exceeding it slightly. It's a good start for us there. It's good to see that we have the ability to do this kind of, if I call them exotic products, they are in a way not exotic, but they are far away, and it's a new market, and I'm really proud of that. Our team has the ability to do that. Looking at 2018 further, some big topics affecting Tomra, plastic oceans. We are swimming in plastic more and more.
One way, our way to contribute to solving that problem is to reduce the inflow of plastic. We do not intend to clean up the ocean. We don't have the technology to do that. By collecting plastic material, we can prevent it from entering to the ocean, and that is our approach to it, and that's how we also see our business contributing to a major mega problem. We also had a lot of discussions on ban on single-use plastic, on political level, on European Union level, and we see effects of that. I will talk shortly about that. circular economy is a topic which we see more and more every day, going away from linear, where you consume, throw away. Where you say consume and reuse, or reduce, reuse, recycle, and that's spot on where we want to go.
European Union came out with a very clear indication of what they understand as Single-Use Plastics Directive. I'll talk about that shortly. It largely affects Tomra. We also had a Capital Markets Day where we clearly staked out our future. Tomra is zooming in on two main areas. One is circular economy, the other one is future food. That's not in any way a disconnect to the past, because the solutions we have from the past will be there in the future, present and future, and they support this mega trend. I hope you felt that that was a logical extension to where we want to go. That's at least where we say, this is what Tomra looks like in 2030. If you don't listen to me too so much, let's look at the results. For the year, we had a 16% growth.
Of course, there were acquisition elements in that, so adjusted for that, 11% growth in revenues for Tomra Group, nine% in collection, and 14% in sorting solutions. Quite a good year in that regard. Also, the earnings went up in a nice way. We can see that we are a growing company which have been growing now steadily year-on-year for quite a long time, and that goes in most dimensions. I will not go further into the financials because Espen will soon take them. Let me just talk shortly about the fourth quarter. Also a good ending of the year for us. We feel happy with a revenue of 21%. No particular events except for maybe that Queensland actually went live in the quarter. Beyond that, no particular events. We see continuous good momentum.
Recycling was a little bit slower in the quarter, but there is no indication for slowdown. That was just how it distributes over the quarters. All in all, stable and good. We are very happy with that. Looking into the European Union Single-Use Plastics Directive, this is important. European Union, actually as the most prominent political body here in the world, I would say, is going out and saying by 2025, 25% of all PET bottles will be built on recycled content. They will use recycled content when they make new bottles, 25% out of them. By 2030, 30% of all plastic bottles should contain recycled content. That's very, very important. It's not only telling that we need to collect the material, we also need to reuse it.
That will enforce the industry to really look into how they design the products, and we need to build up the systems for enabling this. For Tomra, that means good opportunities. I cannot guarantee anything. We see good opportunities both in terms of collecting, because by collecting, number 1, you get hold of the material, which is very important in order to recycle it. Number 2, you get hold of the material in a good quality way. And number 3, you actually have visibility onto what you get hold, so that the downstream know what's coming in here. If you think of a traditional waste management, a lot of waste is coming in, but it's very unstructured. You don't know the quality, you don't know the quantity, et cetera.
Such a system is very precise, and we know that by experience, because our machines, to 65%-70%, are actually connected, so we know exactly what's happening on the instant. That's very important. Secondly, they're talking collection targets, 77% by 2025. That is what should be collected of all the plastic bottles, and 90% by 2029. In our world, we don't think that this is possible unless you have a deposit system. We will see what comes as proposed, but we think this is a very positive indication for the industry. Further to that, talking about Extended Producer Responsibility, it's a very important element. It costs money to take back waste, and the Extended Producer Responsibility should help that. They also talk about cross-collaboration, which I touched on before, which is a very important element to really make this shift from a linear to a circular economy.
The whole industry must work together. What's working good today is the front end, the collection and the recycling, but also these consumer goods producing companies or bottle producing companies need to adapt their process and say, until now, they used virgin material predominantly. Now they need to design their processes in a way that they can take recycled material. Of course, the industry also need to guarantee the quality and the quantity at any given time. It's a system that needs to be put in place. We have the know-how to do that. We are very eager to do that, and we look forward to contribute to realizing such a system for the European Union, and I hope that will also be some kind of a motivation for other parts of the world.
In addition to that, there will be some product bans, which is very logical. Think of it, the plastic is a fantastic material. It's designed for several hundred years of usage. You have a plastic straw, which you might use for 10 seconds for a drink or a minute for a drink, depending on how eager you are or thirsty you are. The ear tops with a plastic bar in the middle there. It's not needed. You can actually find replacement for things like that, and they are addressing that, which is totally right. That is not so relevant for our business case, but it's a good initiative in the totality. With that, I think I should hand over to Espen to give you some more fundament into the numbers.
Thank you, Stefan. First, as always, quick look at the currencies, comparing fourth quarter in 2018 versus 2017. We see a rather flat EUR, but a stronger USD, both versus NOK and versus EUR, which is a positive for sorting. On TOMRA Collection, we also have a lot of USD costs, it's more neutral on the bottom line in TOMRA Collection. Financial highlights, strong quarter, all-time high revenue, not only on group, but also for both TOMRA Collection or sorting isolated, +14% and +17% respectively. The margin is stable in both units, meaning the gross margin. Operating expenses is increasing because of higher activity in both business areas, and also some inorganic from BBC. Bottom line, EBITDA NOK 396 is up 32% from last year.
Looking at balance sheets and cash flows, measuring the year-end currencies, we also have the same effect where the USD has strengthened around 6% and EUR more flat-ish, 1% up, meaning end of 2017 versus end of 2018. The balance sheet has expanded somewhat due to currencies. Looking at the line items, in addition, you will see that starting from the top, intangible assets has increased because of the BBC acquisition. The tangible non-current assets, what we previously called fixed assets, has increased because of further expansion in New South Wales, Queensland, and some extent also some redemption centers, some material recovery activity in the U.S. Inventory and receivables has increased, so has also non-interest-bearing liabilities, meaning mainly accounts payables, but the net of them has also increased, being higher working capital today than we had previously. Again, a consequence of higher activity.
The interest-bearing liability has increased somewhat because we have almost, but not entirely, managed to finance both the BBC acquisition, New South Wales, Queensland, and the dividend through cash flow from operations. Talking about cash flows, we came in almost identical to last year and the year before. Saw a rather strong cash flow, even though we have expanded somewhat on our working capital, particularly throughout fourth quarter compared to last year. Solidity and gearing is solid and the gearing is low. We will implement IFRS 16 starting first quarter this year, and the estimated effect, meaning the total balance sheet, is assumed to increase with little south of NOK 1.2 billion. It's mainly land or property and vehicles which you have to put into the balance sheet. The final figure will be announced together with the first quarter report. Dividend.
Tomra had, for the last 8 years, been living under a regime where we pay out 40%-60% of the earnings per share in dividend. Looking at the top left graph, you see that we have been within this bound. This one is expressed in absolute figures, and the top right is in %. We also, this can be done because we have a rather low gearing. It was 5 years ago, around 1.5. Now it's stayed below 1 for several years, even though we during the last 2 years have acquired Compac, acquired BBC, invested in New South Wales, invested in Queensland. We still have a low gearing. As I said, the equity is solid, north of 50%. Tomra, with significant recurring revenue, strong balance sheet, could take up significantly more debt than we do today.
Even now for national strategy, we say that we should maintain investment grade, defined as at least BBB- in S&P's rating system. We are not rated and we don't plan to be rated, but banks tell us today that they look upon us as A-. If we accept that at least can take 3 times interest-bearing debt or EBITDA as debt and maintain investment grade, there is, at today's run rate, room for take up NOK 3 billion more of interest-bearing debt. I personally believe at least in ramp up here that we can go slightly above 3 also. At the same time, there are significant opportunities out there, as you know, and some of them needs Tomra to invest also.
The timing of this and what role Tomra will play and what kind of systems that we will see materialize is, of course, somewhat uncertain. What we see is that within the next 12-24 months, it's unlikely that we will not manage to execute upon those opportunities with the strength we have in the balance sheet and the gearing opportunities we have standalone. For that reason, we feel it's right to give out some extra dividend now. In the long term, let's see what's happening. I hope that if everything materialize in a positive way for us and we will need to invest in some of these models, we will also be allowed to go back to the shareholders because we are at that state has proven that we continue to manage to provide a decent return on these projects.
That's not likely within the next 12 to 24 months. For that reason, there will be paid out an additional NOK 2 on top of the NOK 2.50 as an ordinary dividend at the after annual general meeting, assuming they will approve the board's suggestion. With that, we leave the stage for Stefan and TOMRA Collection.
Thank you, Espen. We are in a situation where we are growing in both businesses. TOMRA Collection traditionally have not been growing so much. We have been experiencing now more new markets coming on board. We had also in the period 2015 to 2018, we had a replacement in Germany. We see that cycle now is towards an end. Maybe even 2017 and 2018 was already kind of the new normal. We think something like that will be the new normal in Germany. What we have seen in 2017 and 2018 in Germany, we had a very high spike, if I say so, in 2015 and 2016, actually grew 35%, 2014 to 2015. That was a strong growth for the whole business and Germany more on top of that. Of course, we are very pleased because that was a big project for us.
We launched a new technology that could have failed. We got a lot of replacement opportunities in the market, it seems we were timed very well to capitalize on that. We were a bit overwhelmed when that started. It came more in the beginning than we had expected. If I look in the mirror from now, looking back, I'm very pleased. We could expand our market share. We got our new technology both working and embraced by the market. A great period. There is no further drive for growth from Germany. As such, we think it's still a stable market, but rather now on a new normal. That's what I wanted to have said here.
If I look into the last quarter, we had modest growth in all traditional markets, modest growth in local currencies in Northern Europe and modest growth in North America. That's good. The drive of growth is coming predominantly then from new markets. In this case, New South Wales contributed to growth because it was the first full year, and then towards the end of the year, we got a little bit support also from Queensland. Such a market like Queensland, New South Wales, it takes some time until they are the full utilization of the system. Even we might have all the machines out there, but there will be a steady growth as the more and more consumer embrace the new system. That's our experience. That will be positive for us, going forward as well.
Also remember, we are investing quite a lot in our businesses, both in sorting and in collection. It doesn't come for free to go into these new markets. We have to prepare quite a long time. We might need to do some adaptations of product design, which we have done in both New South Wales and Queensland, and we might also need to re-engineer our production systems at a time. It doesn't come for free. This growth also drives some operating expenses, but I think everyone who has experience in the business understand that's natural. Looking at it, we had a 14% growth in the quarter in collection, which is nice. I think all corresponding numbers are following through in a good way, and I'll let Espen take the numbers later on.
I focus a little bit more on some of the markets we are zooming in on. As I said before, in wake of the European Union, in wake of plastic ocean, there is more momentum into deposit markets. Western Australia is maybe the most advanced one here. They are in a process where they are evaluating the new system here, and we expect to get some feedback on where they are heading fairly soon here. They are in a very final stage. Will be exciting to see whether they will lean towards the Queensland system more or towards the New South Wales system more. We are, of course, experienced in both of them, I don't want to give an opinion of which one is the better one.
Queensland is fairly new, we don't have so much experience, but we are ready to serve if it would go in any of these directions. Scotland has been clear that they want to introduce a deposit system since some time, they have had a consultation period that has ended. What is next to be looking at there? It will be the recommendation of the consultation period, and that is something we are actually expecting any time now. That should come here fairly soon to see what do they decide after that consultation period. They are clear they want to go ahead. They are not waiting for England, it's a positive, and we're expecting there somewhere around 2020, 2021 that system will go live. Portugal has come a little bit like a rising star from a blue sky like they do in soccer.
They're good there, too. They have given us some kind of indication that there is a law in place, they want to do something. They have instructed retail to prepare for making pilots, they want to proceed with that. That's really a positive development for us. Of course, we are supporting and geared up to support that, too. Potentially 2022, we think, could be a system there. We have England, which has been on the agenda for quite some time now. They have delayed the system. Originally was set 2021. Now it's set 2023, but they have also affirmed the system, we are pretty sure it will come. They now has launched their consultation process, which is a logical step in such a evolution, that should take 12 weeks if I'm rightly informed.
After the 12 weeks, they will close the consultation. They will go in and do their evaluation, and then hopefully we will see some outcome of that. When we say England here, that includes also Wales and Northern Ireland. That is the definition in this case. We think that's exciting. More than we have had in the past, and these are more concrete ones. Of course, the other countries in European Union and abroad that are looking into this, but these are the ones we think is worth talking about at this stage. With that, let's look into how that business has performed financially, Espen.
Thank you. Quick look at the figures. As I said, all-time high revenues is actually stronger than we had back in the best quarters when we had the German replacement race in 2015 and 2016. The contribution for growth is, of course, Australia, which is reported on the rest of the world, and also to some extent, the U.S. has performed good the last quarter. OpEx is slightly increasing. Last year, meaning for quarter 2017, we had extraordinary costs related to New South Wales ramp up. This year we have the ordinary running expenses from New South Wales, Queensland ramp up, also general ramp up on top of this. These elements equals out more or less. That was the collection figure. Then we are going over to sorting.
Since we know that collection is business that is more tied to deposit markets, there's still no such limitation on sorting. We have installations in about 80 countries. We have more than 10,000 sorters. We are active in recycling, in mining, and in food. We have experienced very strong momentum in recycling. We have experienced very strong momentum in mining. We have experienced good momentum in food. As I said before, food is less event driven, mining is more cyclical, and recycling is really capitalizing on this plastic ocean, National Sword events, which I mentioned about it before.
In the extension, that will also transform into a new set of demand for recycling because when the consumer goods companies say we will use recycled material like we saw in the European Union directive, then we will have more need for sorters again because then it's really about making a very fine product. Plastic being a commodity or a resource that is in unstructured form, not really usable, but to be able to deliver a very defined specification over time, that is the job. That you cannot do without the sorters, because you cannot even see with a human eye the difference between certain different plastics. They might look the same to you, but our sorters will see the chemical differences between them. In order to build that circular economy, that is a absolute needed function.
There will be, in extension, a replacement from this National Sword-driven market, which we experience right now. There will be a new market demand growing up here progressively over time. We are very positive over the long-term outlook here. We also enjoy a very strong market position, well north of 50% globally. We are well-placed, I would say also, when it comes to recycling in emerging markets. Really well-placed. I am happy with that. Food has a longer journey when it comes to emerging markets because our technologies are really developed and geared up towards the high, really sophisticated processes you find in North America and in Europe when it comes to food processing. When you go to emerging markets, say China, India, you come from a complete different level. You come from very basic, very manual. There would be a more gradual solution.
For us, it would be the challenge, can we find the right solutions to support that evolution? These are markets we are looking for. There is no immediate end to the demand here. I do not see a short term, long term, or medium or long term, there will no be no end in demand. The demand is there, and it is a very important sector. We are pleased. I think we are well-placed in all these three, and the business really has progressing very well. When Espen show you the financials later on, have a look at the long-term development here, how that has been growing. I think most of what you will see from Tomra going forward will be organic. I do not exclude some acquisitions, but predominantly organic. I feel we have a portfolio that is fit for what we want to do, and that is good.
There is nothing really we need to divest, and there is no big investments needed in that regard either. We are fit. We can do a lot organically by our own development of products, of solutions, and by geographic expansion. It will drive some cost increases, but we also see that we are growing, and profitability-wise, so too. With that, I think I have already talked about the different sectors. I pass over to you, Espen, to sum up the financials around that.
Yes. Yeah. Strong revenue growth. By far the best quarter we have had in sorting. All major geographies are contributing and on business stream level, it is food and mining, which actually is the ones that contribute most to the growth this quarter. Gross margin is stable, despite somewhat negative product mix. The additional revenues helps on the margin side, even though most of the cost of goods sold in sorting is variable. There are some fixed element also, additional volume helps on the margin side. Operating expenses is increasing as a consequence of higher activity and preparations for the future. Looking at the order situation, we have, as I said, strong revenue in fourth quarter. Since also the order intake was strong at 19% in the quarter, we also end the year with a healthy order backlog.
I'm sometimes being asked about seasonality. Looking at it, you see here that it's very typical fourth quarter with strong revenue. Many customers want to complete orders before year-end. At the same time, consequently, you see a lower order backlog at the end of the year than the usual that three quarters before. Looking at the order backlog, one should look one year back. That's the most relevant reference point in that respect. First quarter is usually somewhat slower, and that's related to the food seasonality where most of our activity is in the Northern Hemisphere, and it's winter and customers do not want installations that much in that period. The overall conversion ratio is assumed to be around 75%, meaning we believe today that the revenues for first quarter 2019 will be 75% of the order backlog at the end of fourth quarter.
This is not guiding. It's just an indication for those that want to model us. This was the past. A quick look at the future, starting with collection. Overall, we expect base business to be stable. Germany, a significant market for us, was stable 2018 versus 2017 after the replacement race in 2016 and 2015. They assume also going forward, no significant changes in the activity in that region. So it goes also for most of the units. On top, you will see we get the full year New South Wales effect with the full installation and also Queensland, which is not in there for the first three quarters of 2018. Consequently, comparable figures will improve for that reason. The rest of business will be stable or slightly increasing. That's the top line. When it comes to gross margin, we don't expect any significant changes.
OpEx is very dependent upon what opportunities we see in the market. As you know, we are ramping up the organization, preparing for what is about to come, and some of this OpEx is related to concrete project, and the timing of those, as you know, is somewhat uncertain. All in, sometimes ask about a figure. Let's assume that the OpEx next year, very round figures, will be NOK 100 million above 2018, meaning 2019 above 2018 for the entire year, as just an indication, and let's see where we end up. On the sorting side, I said 75% conversion ratio. The momentum in general is good in that business area. OpEx is probably to be more in line with what we saw in fourth quarter. Since we have had a ramp-up in fourth quarter, it's maybe not that much increase in the next quarter come.
Also remember currencies. So far in first quarter, we have experienced a strong USD. Compared to first quarter last year, we consequently could assume some tailwind on the currency if that stays out the rest of February and into March. That concludes the presentation. We open up for questions from the audience and from the web.
I think we can start with a couple of questions from the web, and then we can take the questions from the audience afterwards. There's one question from Thomas Grafjell. Can you quantify the numbers of countries that have been in contact with Tomra regarding information for introducing a deposit scheme?
Espen, you are better at counting than I am.
Of course, Tomra is, to some extent, a company that is viewed upon the competence not only within deposit systems, but more and more as kind of understanding the entire value chain and the circular economy element into this. I think it's fair to say that we have delegations in Asker, at our headquarters every week from someone visiting us that want to understand better from all over the world. Where they come from, who they are, and so on, I don't think it's right to announce here, and having a delegation talking to us is not necessarily the same as they're going to implement something that could be of value to us. It's definitely much more interest from all around, from governments, from stakeholders, from people out there that want to understand and discuss with us.
This creates opportunities for Tomra, and it illustrates that there are things happening out there that is, hopefully, things we could monetize upon because the focus is completely different from what it was three, four years ago. I don't think I can be more precise than that, things are happening, yes.
Thank you, Espen. That's really precise mathematics.
Thanks.
We take the next question, which is from Marcela Klang in Handelsbanken. Can you specify how big was the impact of the BBC acquisition on operating expenses this quarter? I guess, again, numbers.
I think I'll just refer to disclosure note six in the report, quarterly report. You'll find all the figures there. Just use that one.
Next question from Petter Nystrøm. How would you consider TOMRA Collection's possibilities in Turkey, Belarus, and Jamaica, all mentioned in press recently?
I think we have to see it the following way. There is both the situation of markets which we have to evaluate because of the complexity, simply. Take Turkey, it's a very vast economy, a very vast geography. If we were to enter into that market, we have to think very carefully, can we do that? Do we have the capability? Because one thing we have to say, if we go in, we have to do it good, that's our, so to say, quality stamp, which we live up to. We should not go in if we don't think we can do a good job. Of course, it becomes what kind of model is it? Is it a sales model? How do we then serve it? Is it an investment model? Do we feel that it's the right investment for us?
It's a long way to decide upon things like that. I don't think it's one easy answer. In fact, that maybe illustrates that we will have more of this kind of questions going forward. In the past, it was pretty easy. There comes a new deposit market. For sure, we jump onto that. In the future, there will be economies which are simply, we have to evaluate, prioritize also. Can we do it in a good way? Can we not do it in a good way? What is the requirement of the system? Does it require big developments of technology? Do we have a plug-and-play solution for that. Is there capital required for where we should own the install base? Do we feel that is right or not? Can we have people working there, and do we have the competence to serve the market?
This is a very fluffy answer, but I cannot give it more precise.
Thank you, Stefan. I think then we open up for questions from the audience.
Thank you. Good morning, Eivind Veddeng from DNB Markets. I have two questions. One fairly easy and one more difficult. Start with a difficult one. In the consultation periods that is currently ongoing in the different markets, do you have any feedback or thoughts you want to share on what the discussions are going through in terms of bottle size? What will be included, if it will be returned to retail, will it be lease markets, and also what is competition doing? Secondly, the easier question is IFRS 16, is it possible to or give some indication on the P&L impact on lower, sorry, higher EBITDA, higher depreciation, and higher interest costs? Thank you.
Let me start with the easy one. As I said, we are somewhat south of NOK 1.2 billion in asset and liability, when the EPS effect will be zero, or no material effect on EPS, but it will be some effect between the line items. I would assume that the monthly effect will be close to NOK 3 million between EBITDA, sorry, between operating expenses and finance items, meaning the EBITDA will increase, improve, and the finance will decrease for that effect. There will also be a significant effect on the cash flow because now the lease payment is taken out and being replaced mainly with down payments on loans. That figure, I don't have exact figures for it yet, but it will be the same for all companies implementing this. It is more kind of reclassification.
The cash flows in the bottom is the same, but the way you have to report it will be slightly different. That hopefully give you some indications on the IFRS 16 part. The other one was a very broad question. What the feedback and, I don't know if you want to say-
I can say a few words.
Yeah.
There is always some risks if we can speculate, and we prefer not to speculate, to be honest with you. There will be facts on the table when the consultation is over. We can get some indications, but they're also not proof. Like in England, there might be that they will include more kind of a holistic system with many bottles, both for at-home consumption, for on-the-go consumption. Again, exactly how that spills out and what that means in business, I rather prefer that we wait until we have the facts, to be honest with you, because we have also experienced in the past that the systems do not always come as we have thought. When we have the proof in the pudding, then we can decide what it means for us.
That is a very vague answer, Espen, you're better at handling these questions than I am.
It's a relevant question. You're pointing out those discussions that goes on in almost all markets. Where will the return be? Will it be inside the store with very close proximity to the stores, or will it be someone else? Who will own the machines? How advanced will the system be? Will there be use of machines? How much use of machines will there be? How high will the deposit rate be? High deposit meaning higher return rate. The convenience for the consumers, opening hours, and also how broad will the system be when it comes to size of objects, type of objects, plastic, aluminum, glass, and also the content, beer, sodas, and so on and so forth. All these things are up for discussion.
England is the biggest one now, which is kind of rather concrete because they have start the consultation period and they describe two different versions here. It seems like they have decided upon going broad, meaning all material types. It's been mentioned that this privilege is GBP 0.10, which is a meaningful amount on the deposit. It seems like they want to have a convenient system with significant infrastructure in place so people can easily return their empties. It's a discussion about size of objects. Should have more on the go or should it be a full system? That's open for discussion and let's see what comes out of that since it's all early in the process. As Stefan said, it's a 90 days consultation period, so a lot of stakeholders will probably announce their view upon this.
In general, it seems like they have approach to this, which will ends up with something that looks like a deposit system that we have seen other places. It seems they have a clear ambition from the government side, that's a good start.
When it comes to competition, I think we will see all players being very interested in a market like that.
Absolutely.
Thank you. Knut Erik Løvstad, Kepler Cheuvreux. In terms of the OpEx, last year you had the NOK 57 million ramp-up cost, specifically related to Australia. You're indicating this year that the ramp-up costs or the additional costs, if we can call it that, is roughly of the same magnitude. Last year, we saw that it was sort of more of a one-time event in one quarter. You seem to indicate now that we should expect the costs to be roughly NOK 100 million higher in 2019 compared to 2018. I guess it's not sort of a one-time event anymore in this quarter. Should we expect now, what is that higher costs? What actually are you doing in terms of a continuous ramp-up at this stage? What are those costs element?
Yeah. It's just not one element, it's several things. Some are market specific, most of this currently is more general when you're on the production side, on the logistics side, or sourcing in general. It's on R&D, and it's market intelligence, governmental affairs, and the business development resources. I think personally, we've been challenged, is it possible to ramp up quickly on the production logistics? Of course, I see the challenges, that's maybe not my biggest concern, because I think that is something we can deal with if we just plan properly. This is having all the resources, the competence, having the dialogues with the markets, establish ourselves in new markets, having the people on the ground that has done this before, have the competence and to build deposit systems. It's about skilled people to being out in the markets.
That's maybe the biggest challenge in this, it is something we have to invest on upfront also. It's the total of several things. So far it's not that much market specific, but that will come as we go, going forward here. Maybe not a very precise answer, but it hopefully gives you a flesh out what we're doing.
I just want to make a little bit more clear. Let's say there are five markets now within the European Union that are looking to, potentially introduce a deposit as result of the European Union Single-Use Plastics Directive. What does it mean for us? We need to be there. We need to be there to consult with the governments. We need to be there to talk to the relevant stakeholders like retail and so on. We need to actually establish a team of a number of people, not huge, but a team. There might also be new requirements out to that market saying that, well, if we want to serve that market, we have to have these and these specific features in our products.
It might not be a completely new product, but take in New South Wales, we are using PayPal. That was a new feature which we haven't used in the past. I just give it as an example. There will be product adaptations or product developments. There will be this consultation, and then of course, if we then think that we will have to produce more in the future, we also need to ramp up the supply chain from suppliers, making sure that we have sufficient capacity, maybe back up the source, our own production capacity, are we fit for that? We need to employ people as we go. New South Wales, actually we have, I think, I hope I'm not revealing something I'm not allowed to, but he will tell me off afterwards then. We have about 100 people in New South Wales operating.
To get such a market up and running in a short time, that is an investment. That was an extreme case because that went very quickly, but I hope it illustrates to you that growth doesn't come for free. We need to invest in that. Since we are seeing so much now here in the horizon, we actually need to have a number of parallel processes, and we are investing. We are ready to invest in that growth. We think that if we don't do it this way, we might get a good result, but we might not get the same quality. We want to make a good quality system. We want to contribute to a good society, like we have seen in Lithuania, New South Wales, and I think also in Queensland, where we say when we go in, it's a good system.
It's a Tomra system.
If I can follow up on the growth, we're seeing the consultation period being started already in the U.K. or in England for a possible introduction of deposit system in 2023. The EU target is 77% by 2025. You would expect then that perhaps some of these other markets will have to sort of look at this now very concrete, if you will. What are the initiatives that have been taken in France, Italy, Spain, some of those larger populated countries in Europe?
I think we just mentioned it. On our side, initiatives is that we are building up an organization to support the processes locally and visiting that they will come. The level of consultation on different markets, I think Espen was into that before. It's a broad range, but for sure there are more activities. Please accept that that is nature. It doesn't come for free.
Yeah. I think all markets are to some way looking into this because everyone knows it's coming, and they have to fulfill these new obligations, and no one is compliant with this now. In our opinion, only way to get to 77% and then to 90% is through deposit. All markets, but they are not kind of, some are considered another, but everyone is are someone looking into this. That's what is make it exciting, but also challenging because each country will have their own process, and the solutions will not be the same all over. They will choose their own way, to meet these targets and how to collect the material. We will at least try to be present where there is activity.
Of course, it turns up for us as operating expenses. It's not an investment, in a way you could view it as an investment. We have to invest in operating expenses to be ready to serve these markets. I hope that is giving somewhat an understanding. We see this as fairly safe investments. It's not like maybe something is coming. We think this is really going to happen at one stage or another in the market. We see it would be a mistake from our side if we were not investing in the opportunities.
I think we understand that. It was more sort of what is actually happening in some of those larger countries. At what stage are they discussing, given that England is already in a consultation phase in a way, and it's going to start in 2023.
Yeah.
For most of the other countries, to be up and ready and to achieve 77% by 2025, they probably will have to have a system in place, 2024 maybe. You would think that they would have to start a consultation period fairly soon as well.
Yeah.
Is that sort of happening? Do you see those types of discussions in these markets, or?
We see the discussions happening. They might not have come to consultation. The European Single-Use Plastics Directive is fairly new. It's not even hammered fully, right?
Yeah.
It's not by law yet.
Yeah. It's a ratification that remains, which is a formality.
Exactly. It's very new.
Yeah.
Thank you.
Mikael Nyholt, Carnegie. First a question on Queensland. Given that you had two months of operation now, are you able to say anything about the revenue and hopefully the EBITDA from that region, and eventually what you're expecting for the coming months? I assume that you also there, as in New South Wales, are in a ramp-up period where you don't see full volumes already.
Yeah. We said initially very broad figures, that we will invest NOK 50 million and get NOK 50 million revenue out of Queensland. We are on track on that. I think I'm not prepared to be more precise than that.
All right. Second question then on the margin in sorting solution. For myself, I'd expected a slightly higher margin this quarter. Are you able to say anything about the increase in the operating costs? Is it all related to ramp-up and positioning, or has there been any, call it underlying increases from other cost factors?
I think there is a sum of several things, it's partly about delivering the all-time high revenue we have in this quarter. It's mainly about preparing for the future. Also for that reason, I said that going into first quarter, I think the level we are at now will not increase significantly from that. That's, to some extent, a level you can expect going forward.
All right. I follow your comment on revenues also drives OpEx, coming from a situation where you've said that typically the OpEx is flat and that you'll have a higher degree of operational leverage, therefore my question.
Let me just elaborate on it. I think if you go to, when you see the disclosure note on, I think it's number 10 in the annual report that's been released, you can see how much we use in R&D. You will see at least it was accounted for there. It's 100 million increase in R&D in the group in the 2019 versus 2018, and that explains also partly OpEx increases. It's also investments for the future.
Last one. I was slightly puzzled by the geographical split in the revenues in collection solution. I was surprised by the level in Europe. Is all that related to Germany? There are other countries there with growth then this quarter?
Yeah.
No.
No, go ahead.
That region comprise Austria, Netherlands, Belgium, which is the most important markets after Germany.
All right. Quickly following up on that then, are you able to say anything about how Germany developed year-over-year, Q4?
I have to look into it, Germany alone in fourth quarter. The number installation for the total of the year has been stable, and I think Europe year-over-year is also performing stable. All this could be single orders and so on in markets where quarters could fluctuate a little bit. The European market, including Germany, but also the other countries in that region, are performing rather stable overall, and that also shows the figures if you look at the full year figures.
All right, thanks.
Thank you. Christian Stray from SpareBank 1 Markets. Regarding your 18% EBITDA margin target by 2023, could you give us a feel on in what business streams do you expect margins to improve and maybe when?
I think starting with sorting, we have opportunities to do better. It's both on the cost side, but also it's about revenue growing, where you get the leverage effect upon that. We are in total not satisfied with the margins in some of the areas within sorting. When it comes to collection, it's overall rather good margins, and I think it's realistically hard to expect significant more. Of course, now we will, for a long period, get a negative effect from ramp-up costs. Over time, this, of course, is assumed to generate revenue and profit also. Historically, we have had good margins in collection, and further improvement of that is probably not very realistic.
If I can ask one more question. According to my understanding, it's the mid-market that's driving growth in food sorting market, and thus you also outlined on the CMD in October that you would enter this market. Do you think it would be harder to increase your margins in food when you enter this market? You meet smaller enterprises that are more cost sensitive than the big conglomerates like Nestlé and PepsiCo.
I do have to correct you. I don't think it's the mid-market alone. I think we see growth in most sectors. In food, we have a journey to improve. We are quite broad-based. We are serving a lot of markets, and we have been open about that we are working towards improving that. I think it's actually about many levers. It's not one significant. It's quite a number of areas we are addressing there. Product margin for sure, cost management for sure is another one. Also pricing and focusing on where you sell, making sure that you generate more value. That's more strategically relevant, actually, than hunting for costs. If you can make your customers more successful, if you can drive growth and profitability by improved pricing, that's more where you really want to play than by just running up the costs.
I'm sorry if you thought that I said that you said that the mid-market was going to drive growth. It was just the report.
The emerging markets will be very critical for the future, and there will be a long journey there. That is probably going to be a challenge also. We have to take step by step and find our ways to make that right.
Thank you.
Trond Riiber Knudsen, private investor. You were very modest in your outlook, I think, and it doesn't say much about the growth that is coming. At the Capital Markets Day, you gave a lot of metrics. I don't remember all of them, could you say something about the progress according to those metrics that you gave us on the Capital Markets Day?
What we said on the Capital Markets Day was that within the next 5 years, assume on average to grow top line with 10% organically. EBITA margin should, by the end, at least be 18%. That's the target you're referring to. We also said that this is the average over a 5-year period, and each year will probably be different. Particularly looking at collection, growing the business in existing business is hard. If you go to a market like Norway, you find the machine in all stores, so it's hard to grow when you have a high market share in a very mature market. Growth in collection is very much linked to new initiatives. As you know, there are several initiatives out there, we have good faith that there will materialize opportunities in here. Timing is somewhat uncertain.
We also said that growing 10% in 2019 will be very difficult because there are really no new markets opening up in 2019 that will generate revenue in a meaningful way. Going into 2020, and particularly 2021 and so forth, it will be upside down. We have to look at these targets over the 5-year period. In collection, the growth will likely be much higher in the end of the period than the beginning of the period. In sorting, we don't guide other than give you an indication of the next quarter, which implicit gives a good growth in that quarter. Adding up the opportunities, we feel a commitment to believe also in that segment, even though it's not a 10%, it's not broken down, it should be possible to grow sorting 10% also.
Since there's less recurring revenue in sorting, now around 20+% of the revenue is service related. It's more about getting out there, selling more boxes, and so on, and it makes it somewhat more lumpy by nature. It is, for that reason, also harder to be precise on when the growth's coming year by year. Adding up the opportunities in total, we feel committed to deliver a 10% growth on group level, and I think this makes sense adding up from the units level also.
I don't think we should see that there's any disconnect in what we are saying here short term, what we are saying long term. We just also traditionally are not giving you very precise guidance. That is our way of doing it. Of course, it's not appreciated by everybody, but that has been our way of communicating.
Its financial targets. Yeah.
I like the overperforming part of that. Yeah.
We will try to do that.
I think we can follow up with a question from the web. You have probably answered it, then you can just say that you answered it. It's a question from Petter Nystrøm. How do you feel about the long-term goals sketched out for the CMD today versus when back in September?
I think nothing has changed on the negative side. On the five-year period, we think it's achievable to deliver on those targets and we plan for delivering upon them. I don't know if you have anything more to add.
No.
No, I feel, as I said before, we have the relevant portfolio which we need. We know what we're going into. We see the market evolving. It's just do it. Of course, not everything is in our control. Does the deposit market come, yes or no? That's more likely than less likely now than it was in the past years. We know what we're doing. We have the right portfolio to address it, and the markets are getting even more positive for us. I think there's no disconnect. We feel that we are working on the same track as we committed to in the Capital Markets Day. I think also look back, we have been growing now with some 15% per year over the last five years. We have also lived up to that in the history, so it's not only dream numbers here.
Definitely, we have been open about that there is room to improve on the profitability, and we are working towards that. We also need to accept that we better invest in new opportunities than focus on the single year profitability. We discussed that before here.
Okay. Follow up.
Following up on that, the recycling market looks like the global market looks like it can be growing for many, many years. Have you thought about expanding your business more into this recycling market? Do you see any new opportunities today?
The question is, expand the scope. For us, it's very important. Tomra has a tradition and a philosophy, if I might say so. We focus on what we do. We don't want to step around everywhere. But already by going into circular economy, which we have committed to, that's where you actually start connecting the dots, the collection solutions, and the sorting solutions. With that, you open up new opportunities. For instance, the digital services. What kind of value-added services do I offer? Do I need to develop new type of collection solutions for maybe taking other objects than I did in the past? They would definitely be a lot of questions, but we want to stay focused on our core.
Thank you.
Thank you. I think that's what we had time for today. Thank you for listening and thank you for attending.
Thank you.
Thank you.